More Information on Revenue Sharing
The practice is known by a variety of different names. Some plans and providers refer to it as revenue sharing. Others may call it an expense reimbursement allowance, or simply a "special" payment. But whatever name it goes by, plan provider payments to employer-sponsors of government deferred compensation plans have been a relatively common practice in our industry for quite some time now. This is especially true for medium sized and larger plans that are likely to devote one or more full or part-time administrators to oversee day to day plan matters.
This article will take a look at some of the issues arising out of provider payments and make some recommendations on how to avoid potential pitfalls. In today's regulatory environment, providers, plan sponsors and consultants alike can expect to face an ever-increasing level of scrutiny concerning payment flows related to plan assets. Even where the parties' intentions are the best, situations where a service provider is making payments to a plan fiduciary will almost inevitably raise questions about conflicts of interest, avoidance of kickbacks and adherence to duties of loyalty. The use of careful accounting and documentation to create a record that amounts have been properly applied can come in handy to allay any concerns that might later be raised about the propriety of those payments.
Implications of the Exclusive Benefit Rule.
We all know that, unlike most private-employer sponsored plans, state and local government-sponsored deferred compensation plans are exempt from ERISA's fiduciary requirements. State and local government enabling statutes or ordinances and plan documents vary widely in terms of assigning fiduciary status or requiring adherence to a fiduciary standard when making decisions about dealing with the plan. But, since the enactment of Code Section 457(g) in 1996, all of the assets and the income of a government sponsored deferred compensation plan are required be held in a trust (or a custodial account or annuity contract deemed to be a trust) for the exclusive benefit of plan participants and beneficiaries.
The implications of the exclusive benefit rule are profound. Plan assets and income may only be used for plan purposes and not for employer purposes. And implicit in the exclusive benefit rule standard of 457(g) is that government deferred compensation plan sponsors charged with responsibility for the administration of the plan should adhere to fiduciary principles when dealing with the assets of the plan.
Provider Payments Involve a Use of Plan Assets.
For providers, expense reimbursement allowances and the like represent a cost of doing business. As any other cost item would, these reimbursements factor into vendor pricing. Consider, for example, a state government deferred compensation plan sponsor that receives an annual payment of 10 basis points (.10%) from its deferred compensation plan vendor. And let's assume that the vendor charges a fee of 60 basis points annually for its services to the plan. It's reasonable to conclude that the cost of the sponsor payment is ultimately borne by the plan since, in the absence of the expense reimbursement cost item, the provider could have offered and the plan sponsor could have negotiated for an arrangement involving a fee of 50 basis points (i.e., at a cost reduced by 10 basis points reduction) than it could otherwise. Because the cost of provider payments is borne by the plan, it becomes important to be able to show that the payments are applied in a manner that exclusively benefits the plan and for no other purpose.
Proper Uses and Improper Uses
As mentioned of the outset of this article, ERISA does not apply to government sponsored deferred compensation plans. Nonetheless, interpretive guidance under ERISA is instructive, at least by analogy, in considering the issue. Under ERISA, the proper use of plan assets and plan income is limited to providing benefits and defraying reasonable expenses of plan administration. Some of these are outside expenses - for example, those associated with the engagement of a consultant to conduct an RFP process, or an attorney to draft a plan document amendment required by law. Other expenses are incurred at the employer level. The work associated with monitoring investment performance, reviewing and approving withdrawal requests, and providing communications material for participants that explain plan provisions and benefits often involves a significant expenditure of time and effort by sponsor personnel. And it's with these employer-level expenses that the going gets tricky. On the one hand, for most state and local governments, the enabling legislation authorizing the plan is clear that the employer's general fund is off limits as a source of funds to pay plan related expenses. By provision of statute or local ordinance, the plan is required to be self supporting. On the other hand, under ERISA the DOL has established the principle that payments from the plan cannot be made for the employer's benefit or to pay expenses that the employer could reasonably be expected to pay for. Employers are allowed to recover "actual costs" related to Plan administration, using a "but for" test. In other words, the plan cannot pay for employer costs unless those costs would not have been incurred "but for" the administration of the plan. Costs can include employee payroll costs but not the costs of employer overhead. In DOL's view, the test can only be satisfied in situations where the employee who performs the services would be laid off or transferred if the services were not performed. Where several people perform part-time services for the plan, this test can be difficult to meet. Optimally, where a plan sponsor is receiving payments to defray the expenses of personnel who support the plan on a part-time basis, the employer will want to be in a position to account not only for the time spent on the plan but to be able to demonstrate that in the absence of that work, the employee's hours would have been reduced or that the employer would have been re-assigned to tasks involving commensurate time expenditures.
An Ounce of Prevention.
The old cliché that an ounce of prevention can be worth a pound of cure really holds true in this area. Employers and plan providers all should be able to document the purposes for which plan payments were made and to be comfortable that those payments pass muster under an exclusive benefit analysis.
By the same token, care should be taken to avoid situations that are likely to raise questions. Where an employer's costs tend to be fixed and remain relatively level from year to year, it's probably not a good idea to structure a payment as a basis point percentage of assets. Situations where providers seeking a plan's business find themselves competing largely on the basis of who can offer the largest expense allocation should also be avoided.
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United States Department of Labor Information Letter March 2, 1997 to Kirk F. Maldonado.
United States Department of Labor Advisory Opionion 93-06A March 11, 1993 to Steven Sacher regarding Allied-Signal, Inc.
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